In the News

Salary caps are rationalities responses to cost maximisation in professional sport

Jim Riley

5th September 2019

The expulsion of Bury FC from the English Football League last week continues to generate a huge amount of sound and fury.

Regardless of the apparently dodgy nature of some of Bury’s transactions, the simple fact is that the club over-spent massively in order to gain promotion from League Two last season.

The surge in the costs involved of running a football club has been dramatic. Over the summer, for example, Premier League clubs were involved in transfer deals worth a collective £1.4 billion. Marcus Rashford signed a new contract with Manchester United in July worth £250,000 a week, and quite a few players get even more.

Professional sporting clubs are an unusual sort of beast from the perspective of economic theory.

Economists agree that companies in act to maximise profit. The concept is not completely clear cut. A pricing policy, for example, which gouges customers and increases profits this year may eventually prove disastrous.

But sporting clubs do not even attempt to maximise profits. Their principal motivation is to maximise costs.

Spending more money means getting better players. And better players mean more success on the field.

The correlation between the total amount a team spends on its players and its league position is not perfect, but it is high. It is the principal reason for success.

So there is an inherent tendency for clubs to live beyond their means, unlike almost all other businesses. It is performance on the field which matters.

The behaviour of clubs, however, nicely illustrates another concept in economics.

This is the potential conflict between individual and collective rationality.

It is the collective interests of top soccer clubs to scale down the payments to players.

The problem for clubs is that if they offered stars laughably small amounts, say a mere £100,000 a week, other top clubs, both here and in Europe, would entice them away. It is not in the individual interests of the club to allow this to happen.

One possible solution is for the regulatory body of a game to impose a binding salary cap, limiting the total amount which can be spent on a team.

This works well in American football, for example. As an approximation, all the teams spend the full amount. So unlike soccer, where a handful of clubs dominate, success rotates around.

There was in fact a maximum wage in force in soccer until 1961. It was only twice average earnings, around £1,200 a week in today’s money, and was ended by the threat of a players’ strike.

Nowadays, of course, players able to perform in the Premier League are part of a global market. American footballers are not. The game is hardly played anywhere else.

Players with Premier League skills are exported to and imported from abroad – what economics describes as a tradeable market. In the lower divisions, the players are non-tradeable in this sense.

A salary cap, no matter how tightly drawn up, is always open to creative abuse. But economics suggests it is the way forward for teams in divisions below the Premier League.

Jim Riley

Jim co-founded tutor2u alongside his twin brother Geoff! Jim is a well-known Business writer and presenter as well as being one of the UK's leading educational technology entrepreneurs.

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